Issies in Economic Policy - the Brookings Institution

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The Blind Men and

the Elephant

Barry Eichengreen

T

his paper reviews competing explanations for the

pattern of global imbalances and the magnitude

of the U.S. external deficit. It argues that, far from

being incompatible, existing explanations are all parts of

the larger story. The decline in savings rates in the

United States has played an important role in the emergence of global and U.S. imbalances. At the same time,

favorable productivity trends have made the U.S. a more

appealing place to invest, attracting foreign savings that

help to underwrite U.S. investment and finance the current account. The so-called global savings glut is a factor in the global imbalance insofar as it supports capital

flows to and investment in the United States. Finally,

the Sino-American co-dependency view emphasizes

how Asian countries, owing to a combination of heightened risk aversion following the 1997-8 crisis and their

continued commitment to export-led growth, are happy

with a situation where export demand is disproportionately important relative to domestic demand, a position

that is sustained by undervalued exchange rates and

reflected in rapid U.S. import growth.

Number 1, January 2006T

he problem of global imbalances and the

persistence of the U.S. deficit have been the

subject of wildly differing interpretations. Among

the most prominent are the deficient U.S. savings

view, the new economy view, the global savings

glut view, and the Sino-American codependency

view. These four interpretations have different

policy implications and suggest different scenarios

for the future of the world economy.

Nouriel Roubini has a paper where he likens the

existence of different perspectives to the Kurosawa

film Rashomon, in which a series of observers give

varying accounts of the same set of events.

2

The

analogy is suggestive, which is why I cite it here.

But the interpretations that I distinguish are not

the same as Roubini's. More importantly, I draw

different conclusions from the existence of these

different perspectives. In Kurosawa's film the competing accounts are all self-serving, a pattern that

Roubini suggests carries over to the discussion of

global imbalances. Moreover, in Roubini's interpretation there is only one consistent, empirically

defensible characterization of the facts. Here, in

contrast, I argue that the exponents of different

interpretations have all got their fingers on important aspects of the larger reality. Their accounts are

not incompatible. But they are partial. Grasping

the nature of the problem requires acknowledging

that there is some validity to all four views. The

right analogy is not Rashomon, therefore, but the

blind men and the elephant.

In the following section, I build a discussion of this

point on the platform of the conventional current

account identities. But simply saying that there is

some validity to all four views is not very helpful

for those concerned with the future. I therefore

next address the question of what these scenarios

imply for future prospects. The paper concludes

by drawing out the implications for policy.

Accounting Identities with Analytical

Implications

The simplest way of seeing the compatibility of

the different views is to recall that the current

account is the difference between savings and

investment (S-I) and that the deficit of the United

States must equal the surplus of the rest of the

I S S U E S I N E C O N O M I C P O L I C Y N U M B E R 1 , J A N U A R Y 2 0 0 6

2

The Blind Men and

the Elephant

1

Barry Eichengreen

University of California, Berkeley

November 2005world (S-I = I*-S*, where asterisks denote rest-ofworld variables).

3

In general equilibrium, shocks to

any of these four variables can have implications

for all of them. The deficient U.S. savings view that

the most important factor in the current situation

is low national savings rates in the United States

focuses on a negative